SKP Tax Alert
| Volume 8 Issue 28
Payment by a non-resident to another non-resident is taxable if 'make available' criterion is met
Recently, the Chennai Tribunal (ITAT), in the case of Foster Wheeler France S.A. (taxpayer) vs Deputy Director of Income Tax (DDIT)[1], held that payments made by a non-resident to another non-resident for providing engineering specifications are taxable as ‘fees for technical services’ (FTS) under the Indian Income Tax Act, 1961 as well as Article 12(4)(b) of the Double Taxation Avoidance Agreement entered into between India and USA (DTAA). While doing so, the commonly used argument of ‘make available’ clause present in the treaty was rejected by the ITAT on the basis that the taxpayer was not a layman and was capable of observing the opinion/advice given by the associate company and could implement the same in future projects.

Facts of the case
  • The taxpayer was a non-resident company incorporated in France. It was engaged in the business of providing technical and engineering services.
  • It had entered into an agreement with Reliance Petroleum Limited to provide technical and engineering services with regards to a delayed Coker Unit. During Assessment Year (AY) 2008-09 and AY 2009-10, the employees of the taxpayer worked in India on the site of Reliance Petroleum Limited.
  • In turn, the taxpayer had entered into another agreement with Foster Wheeler USA (Foster USA) to monitor and review the work done by the taxpayer’s employees for an agreed consideration.
  • Though no adjustments were made by the Transfer Pricing Officer, the Assessing Officer (AO) disallowed payments to the extent of INR 3,34,99,151 and INR 14,94,99,978 made to Foster USA for AY 2008-09 and AY 2009-10 respectively under section 40(a)(i) of the Income Tax Act, 1961 (Act), on the grounds of non-deduction of withholding tax.

Key issues before the ITAT
  • Whether services provided by Foster USA are in the nature of FTS as per the provisions of section 9(i)(vii) of the Act?
  • Whether the payments received by Foster USA could be characterised as FTS under Article 12(4)(b) of the DTAA and whether the ‘make available’ clause could be invoked? 
Taxpayer’s contention
  • Mere sharing of the best practices in engineering services in the form of written procedures, forms, specifications and details did not mean that technical knowledge had been made available.
  • Certain procedures which were given to the assessee in the form of writing did not mean that the assessee could apply such procedures in the future without the aid of Foster USA.
  • Referring to section 195, it was stated that taxes needed to be withheld only when profit was earned from a transaction.
  • On applying the provisions of Article 12(4)(b) of the DTAA, the payments made were not in the nature of FTS as such technical knowledge and skill are not covered under the term ‘make available’. It was emphasised that the services could not be 'made available' as the taxpayer would not be able to carry out the said services without any further reference to Foster USA in the future.
  • It was also argued that the technical services received by the taxpayer did not make the taxpayer an expert on the subject. In this regard, the taxpayer relied on various judgements, such as the case of CIT vs Dee Beers India Minerals (P) Ltd (346 ITR 467); Guy Carpenter & Co Ltd (ITA No. 202/2012) (Delhi High Court); Sandvik Australia Pty Ltd (ITA No. 93/PN/2011) (Pune Tribunal) and the decision of Authority for Advance Ruling in the case of Ernst & Young (P) Ltd (2010-TIOL-18-ARA-IT). In the said cases, it was held that once technical knowledge was not made available to the assessee, it cannot be construed as FTS.
Revenue’s contention
  • It contended and stated that the said payments were taxable in India as per the provisions of section 9(i)(vii) of the Act as the services were received by the assessee to carry on business in India.
  • Engineering specifications, services, which are the best in the world, were being provided to the taxpayer by its Foster USA. On completion of the projects with Reliance Petroleum Limited, it would be well equipped and capable of executing identical engineering projects with respect to the details, skills, expertise and information provided by Foster USA.
  • Therefore, what was received was not only technical services but also technical knowledge, expertise and know-how which were in the nature of ‘make available’ services and hence, taxable as per article 12 of the tax treaty.
Tribunal’s observations and ruling
  • When the procedures and specifications were provided to the taxpayer, which was also a specialised company in engineering and execution of construction, these details provided by the foreign company could be used by the taxpayer in its business of engineering and construction.
  • The taxpayer was receiving technical services like specifications, procedures, project management, etc. and was utilising the same in the project undertaken with Reliance Petroleum Limited. The specifications, technical knowledge and advice received from Foster USA was available with the taxpayer and it could be used in the execution of the engineering and construction contract as well as with other clients in the future.
  • The taxpayer was not a layman and was an expert in providing technical and engineering services. Therefore, the taxpayer was capable of observing the opinion/advice given by Foster USA and implementing the same in their future projects.
  • While observing the above, the ITAT has distinguished the various decisions relied upon by the taxpayer. It was clearly held that the technical knowledge, expertise and know-how provided by Foster USA was made available to the taxpayer. Hence, it was liable to deduct tax while making such payment.

[1] I.T.A. No. 744/Mds/2014 and I.T.A No. 641/Mds/2015
SKP's comments
  • It is very clear that even in the case of payments made outside India by a non-resident company to another non-resident company, withholding tax obligations would arise if the services are utilised in a business or profession carried on by such person in India. Furthermore, it is appropriate to check whether the recipient of the services is capable of applying the technical knowledge obtained while receiving the services in order to determine whether such services are ‘make available’ in nature. The fact of whether the same has actually been applied or not is irrelevant.
  • It is also a must to observe the terms of the agreement and the nature of services provided in substance to decide to claim benefits under the tax treaty with respect to the ‘make available’ clause and the same should not be assumed by application of mind.

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